BlackBerry Arbitration Ruling Cuts Into Qualcomm's Profit -- Update

By Ted Greenwald 

An arbitration decision in a dispute with BlackBerry Ltd. weighed on Qualcomm Inc.'s earnings in the latest quarter, a further blow to its results after the chip maker paid a hefty South Korean government fine the previous quarter, and a reminder of ongoing challenges to its patent licensing business.

The smartphone chip leader reported a second-quarter profit of $749 million on total sales of $5.02 billion, as the arbitration decision cut sharply into the company's top line and helped pull down revenue in its patent licensing segment by 40%, to $1.33 billion. That division, which licenses patents essential to mobile communications and collects royalties on nearly every smartphone sold, typically brings the majority of Qualcomm's pretax net profit. The impact from the BlackBerry decision amounted to $974 million, the company said.

Overall, Qualcomm reported earnings per share 50 cents, down from 78 cents a year earlier. Adjusting for certain factors, Qualcomm reported per-share profit of $1.34 a share, topping analysts' expectations of $1.19, according to Thomson Reuters.

Qualcomm, meanwhile, worked to quell concerns over royalty payments withheld on sales of Apple Inc. iPhones. It said Apple's contract manufacturers had underpaid royalties during the quarter commensurate with amounts that are currently in dispute.

The question is how much of those royalties will continue to be absent going forward. Qualcomm noted as much in its report, saying it wasn't clear whether Apple's manufacturers would underpay during the third quarter, potentially hurting its revenue and profit.

Still, shares of Qualcomm rose on the earnings beat, climbing 2.4% after hours to $53.85. The stock's price has dropped sharply this year, down 19% through Wednesday's close and the worst performer in the PHLX Semiconductor Sector Index year-to-date, as the U.S. Federal Trade Commission sued the company for anticompetitive practices in its patent licensing division. Qualcomm has filed a motion to dismiss the case.

Days later, Apple filed its own allegations of unfair dealing around Qualcomm's intellectual property licensing business. Qualcomm has characterized the conflict as a commercial dispute in which Apple aims to cut costs.

For the current third quarter, Qualcomm projected that its adjusted earnings per share would range from 90 cents to $1.15 a share, compared with analysts' estimates of $1.09 a share.

Beyond its business licensing patents to phone makers, the San Diego, Calif., company holds dominant market share in mobile chips. Its latest high-end smartphone chip is in a portion of Samsung Electronics Co.'s flagship Galaxy S8 phones as well as flagship devices from Sony and Xiaomi, Qualcomm said, and Apple uses its communications chips in some iPhones.

Qualcomm's chip sales have declined in recent years after a period of robust growth, reflecting slowing growth in smartphones. The falloff has led the company to set its sights on new markets. In the latest quarter, its MSM chip shipments fell to 179 million from 189 million in the year-earlier period.

Qualcomm's equipment and services division posted $3.69 billion of revenue for the quarter, up from $3.35 billion a year earlier.

Write to Ted Greenwald at [e-mail]

(END) Dow Jones Newswires

April 19, 2017 17:33 ET (21:33 GMT)

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